CARES Act and Paycheck Protection
When the novel coronavirus (COVID-19) pandemic wreaked havoc on the world economy, the U.S. government stepped in to provide relief under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. One of its significant measures was the Paycheck Protection Program (PPP), with almost $350 billion to assist small and medium-sized businesses affected by the enduring financial strain of the COVID-19 pandemic. But, recollecting its frenzied launch, it is not surprising to note some fraud concerns in the distribution of PPP funds.
U.S. Treasury Department’s Actions
Looking for feedback from lenders to improve future programs and address the discovered flaws in PPP, the U.S. Treasury Department’s Office of the Comptroller of the Currency (OCC) is identifying issues and taking action to tighten regulations. Consequently, in response to the fraud concerns, the Office has expressed the requirement to ensure it can identify all forms of fraud that occurred in light of the chaos in setting up the PPP program and taking into account the fraudulent activities being unearthed in comparable federal relief programs, the issue of fraud identification is likely to face increased focus.
PPP Fraud Concerns
Apart from loan stacking, receiving PPP loans from multiple lenders or banks, other fraudulent concerns are arising from the PPP program. Federal agents investigating companies that managed to unlawfully obtain funds from PPP will prosecute companies that are liable for prosecution. Given the depletion of the PPP funds occurring almost instantly, companies that took advantage of the PPP loans face a higher risk of prosecution. Engaging the services of experienced federal counsel will mitigate exposure to substantial penalties.
PPP Loan Fraud Constituents
Various acts or omissions can lead to charges of federal fraud against the Paycheck Protection Program. While misconstruing eligibility, inadvertently or otherwise, may be a valid reason for prosecution, it also means that intentional misrepresentations become the stronger basis for criminal charges on fraud. In essence, PPP loan fraud includes loan stacking, PPP loan application fraud, fraudulent loan certification, using funds for ineligible business purposes, using PPP funds for fraudulent purposes, fraudulent loan forgiveness certification, misrepresenting or concealing information during a PPP audit or investigation.
How Loan Stacking is Executed
Loan stacking is when a single company obtains PPP loans from multiple lenders. The OCC has confirmed that it is focusing specifically on this type of fraud for prosecution. Given that the federal government can track the distribution of all PPP funds, some companies that received funds from more than one lender may become early targets in the government’s prosecution efforts.
PPP Loan Application Fraud
PPP contained numerous eligibility criteria, with misrepresentation of such information while applying for the loan resulting in companies being prosecuted. In order to become eligible for PPP loan, a company must misrepresent their size as having 500 or fewer employees; An eligible company must not misclassify employees as independent contractors to stay below the 500-employee threshold; Misrepresenting that the company’s size meets SBA employee-based size standards for eligibility in their industries for companies with more than 500 employees; and, Misrepresenting the company’s payroll costs to increase the loan amount within PPP guidelines for obtaining loans.
Fraudulent Loan Certification
PPP loan applicants were required to make certifications in good faith. Any fraudulent certification could lead to charges for federal fraud. The certifications include but are not limited to: “Current economic uncertainty makes the loan necessary to support your ongoing operations,” “The funds will be used to retain workers and maintain payroll, or to make mortgage, lease, and utility payments,” “You have not and will not receive another loan under [the PPP],” and “All the information you provided in your application and all supporting documents and forms [are] true and accurate.”
Misusing PPP Funds for Ineligible Purposes
PPP funds can only be used for payroll costs, including benefits, pay interest on mortgage obligations, pay rent, and utilities. PPP funds can only be used to cover expenses under obligations that existed as of February 15, 2020. PPP funds used for any other unauthorized purpose becomes an act of fraud and possible grounds for litigation. Companies receiving PPP funds must accurately document the source of payment for all legitimate and non-eligible expenses to ensure compliance with regulations during a federal audit or investigation.
Using PPP Funds for Fraud Purposes
Individuals found to be personally involved in fraudulent activities with PPP loans could face criminal charges. Misusing PPP funds with no intent to repay the loan, utilization of PPP funds for other purposes besides personal use, or not meeting eligibility requirements carry higher legal risk. Under the False Claims Act, a lawyer could face ten thousand dollars in fines and up to five years in federal imprisonment while company owners and executives could be at risk for hundreds of millions of dollars in criminal fines and decades behind bars.
Fraudulent Loan Forgiveness Certification
While the Paycheck Protection Program maintains a low-interest rate, eligible companies are currently minimizing loans. In order to obtain this reduced loan and have it forgiven, PPP recipients must continually meet eligibility criteria and provide documentation of using PPP funds for authorized purposes. Companies must certify that the documents are accurate, including the use of forgiveness in keeping employees and making necessary mortgage, rent, utility payments.
Misrepresenting Information During PPP Audit or Investigation
PPPs have audit and investigation clauses related to the use of PPP loan funds. Companies must be cautious and not disclose potentially harmful information. Simultaneously, there is an obligation to avoid making any misrepresentations or concealing vital information during audit or investigation. Doing so constitutes a form of fraud that carries charges and is criminally punishable.
What to Do When Targeted in SBA PPP Loan Fraud
When a PPP loan fraud audit or investigation targets irrespective of their personal involvement, the best course of action is to engage experienced federal defense counsel immediately. This is a serious matter that requires timely attention, and having experienced attorneys will protect individuals and companies from allegations of PPP loan fraud. At Spodek Law Group, our federal defense attorneys have been representing clients, including COVID-19 pandemic-related issues. Thus, we understand the issues and can provide solutions strategically to protect clients facing allegations of PPP loan fraud and mitigate risks.